With the long-standing low birth rate and the lengthening of life expectancy, Hong Kong is facing the challenge of a rapidly aging population. How can one protect the income of a large number of workers in their old age? Hong Kong’s Mandatory Providential Fund (MPF) was launched with the purpose of helping workers in Hong Kong to prepare for their retirement. MPF is a privately-managed, fully-funded contribution system of retirement saving and the design belongs to the second pillar of the five pillars of age old protection envisioned by the World Bank. Currently, there are more than 30 regions and countries with similar systems. Under the MPF system, Hong Kong employers and employees have to make contributions by law to a MPF scheme. When they reach the age of 65 or under other specified circumstances, employees can withdraw the accrued benefits from their MPF accounts for use in retirement. Before the implementation of the MPF system, only 1/3 of Hong Kong workers enjoyed some form of retirement protection. With the MPF now in place, the proportion of protected retirees have jumped to 85%.  The livelihood of Hong Kong retirees is much more assured.

 

 

Pillar Zero: a non-contributory, publicly financed and managed system that provides a minimal level of protection for retirement; Pillar One: a mandatory, contributory and publicly managed system; Pillar Two: a mandatory, privately managed, fully funded contribution system; Pillar Three: voluntary savings (e.g. personal savings and insurance); and Pillar Four: informal support (e.g. family support), other formal social programmes (e.g. health care and housing), and other individual assets (e.g. home ownership).

*Five Pillars of Age Old Protection, World Bank, 2005

 

Under the present system, the monthly employee’s contribution amount is capped at $1500, to allow people with high income to invest in areas other than the MPF. Launched in 2000, the MPF system in Hong Kong is still in its early phase of development, but the Mandatory Providential Fund Authority (MPFA) is keeping close tap of the changes in society, with the hope of improving the system in time to provide the maximum benefits to members participating in the MPF schemes. In recent years, MPFA has taken active steps to lower the MPF operation fees in order to increase the returns of the workers’ investment. The Default Investment Strategy, for example, has set an upper cap on its fees.  In competing with each other for the market, MPF scheme providers are encouraged to lower their fees. At present, about half of the MPF schemes in the market belong to the low-fee schemes. From 2000 to the beginning of 2017, the annualised rate of return of MPF is 3.5%.